I have a problem. And the time has come to publicly admit it; to share it with the group.

Every time I find a cheap stock, I feel compelled to buy it. I just can’t help myself.

Coming from the Research Director of a service named after one of Benjamin Graham’s books, this may strike you as flippant, or perhaps praiseworthy. But I’m serious.

When I say cheap, I mean cheap; down-and-dirty, filthy, cigar-butt cheap. And that leads me into some pretty ugly stocks.

On one of my shoulders sit the metaphorical investing angels of Phil Fisher and Charlie Munger, urging me not to buy this junk. ‘Buy quality’ they insist, ‘the business results will drive your long-term returns’.

The likes of Walter Schloss, James Grant and Tweedy, Browne sit on my other shoulder. And, perhaps too often, they win out. ‘There are no bad stocks,’ I hear them whisper, ‘only bad prices’.

Irresistibly cheap

Take CL Asset Holdings (ASX code CLS), a stock in which I invested a couple of thousand dollars last year. This $3m tiddler looked so cheap I couldn’t resist.

It’s run by the 40-something former head of Powerlan, Theo Baker. See this neat Where are they now? article for a flavour of Baker’s career and an incredibly spiffy photo (or is that Michael Bublé?).

I know I shouldn’t be interested. This is a tiny stock which makes the cost burdens of being listed substantial. And besides, management has a spectacularly bad track record.

Originally named Community Life Holdings, the company’s prospectus was marketed around the ‘opportunity to participate in the growth in demand for affordable seniors’ and other forms of low cost accommodation.’

Raw deal

At a balance sheet level the offer looked like a pretty raw deal for the public. Float investors put in essentially all of the equity (the company had negative net assets before floating) yet received less than half of the company in exchange (42.6%, to be precise).

Funnily enough, that side of things wasn’t heavily promoted. What was emphasised was a forecast fully franked yield of 6.5%, along with an attractive-looking PER of 8.9.

Yet in more than five years since listing, shareholders haven’t seen a cracker in dividends and have watched more than 93% of their capital value vanish (the stock listed at $1 but was consolidated 1-for-10 in May last year).
Meanwhile, the three directors have extracted a combined remuneration of $300,000 or more for each year the group has been listed as the company looked around for a successful business.

Current contenders are short-term lending, boutique funds management, the sale of distressed technology hardware and a business involved in ‘the design and implementation of leisure based sales promotions, customer loyalty rewards programs and incentives for national and international organisations.’ Now there’s a focussed strategy for you.

Fails on almost everything, except price

On almost every score, this is a company that one should avoid. Except for the price, that is.

Although I only allocate a very small percentage of my portfolio to cigar butts like this (and that may be putting it kindly), I simply cannot resist them. At least the secret’s now out; I’m a cheap stock-a-holic and perhaps I need help.

So I’m seeking your input on two points;

1. Is this compulsion deluded, reprehensible and downright stupid, or does it make some sense?

2. If CL Asset Holdings isn’t the statistically cheapest stock on the market today, what is? The voices are whispering…

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